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Form 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2003
--------------
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________________to___________________________
Commission file number 0-13507
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RURBAN FINANCIAL CORP.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1395608
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
401 Clinton Street, Defiance, Ohio 43512
----------------------------------------
(Address of principal executive offices)
(Zip Code)
(419) 783-8950
--------------
(Registrant's telephone number, including area code)
None
---------------------------------------------------------------
(Former name, former address and former fiscal year, if changed
since last report.)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by sections 13 or 15(d) of the Securities Exchange Act of 1934
during the proceeding 12 months (or for such shorter period the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes No X
--- ---
The number of common shares of Rurban Financial Corp. outstanding
was 4,565,721 on May 1, 2003.
1
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The interim condensed consolidated financial statements of Rurban Financial
Corp. and Subsidiaries are unaudited; however, the information contained herein
reflects all adjustments which are, in the opinion of management, necessary for
a fair presentation of financial condition and results of operations for the
interim periods presented. All adjustments reflected in these financial
statements are of a normal recurring nature in accordance with Rule 10-01(b)(8)
of Regulation S-X. Results of operations for the three months ended March 31,
2003 are not necessarily indicative of results for the complete year.
2
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
MARCH 31, 2003, DECEMBER 31, 2002 AND MARCH 31, 2002
ASSETS
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
----------------------------------------------------
Cash and due from banks $ 21,589,334 $ 37,018,337 $ 20,717,141
Federal funds sold
59,350,000 14,000,000 10,105,000
---------------- ---------------- ---------------
Cash and cash equivalents 80,939,334 51,018,337 30,822,141
Interest-bearing deposits 310,000 260,000 645,053
Available-for-sale securities 99,097,514 115,108,762 116,022,554
Loans held for sale 79,787,224 63,536,309 85,635
Loans, net of allowance for loan losses of
$13,491,372 at March 31, 2003; $17,693,841, at
December 31, 2002; and $12,638,515 at March 31, 2002 352,438,519 469,780,785 628,487,031
Premises and equipment 13,732,992 14,695,613 11,830,475
Federal Reserve and Federal Home Loan Bank stock 3,697,100 3,665,900 3,265,600
Foreclosed assets held for sale, net 2,009,790 1,960,276 337,339
Interest receivable 2,649,869 3,966,721 5,488,357
Deferred income taxes 5,397,313 5,495,812 1,965,003
Goodwill 2,249,246 2,323,643 2,499,921
Core deposits and other intangibles 737,620 770,777 686,791
Other 3,317,729 9,733,744 8,569,895
---------------- --------------- ---------------
Total assets $ 646,364,250 $ 742,316,679 $ 810,705,795
================ =============== ===============
See notes to condensed consolidated financial statements (unaudited)
3
LIABILITIES AND STOCKHOLDERS' EQUITY
(UNAUDITED) (UNAUDITED)
-----------------------------------------------------
MARCH 31, DECEMBER 31, MARCH 31,
2003 2002 2002
----------------------------------------------------
LIABILITIES
Deposits
Demand $ 35,141,128 $ 46,114,153 $ 53,804,958
Savings, NOW and money market 110,134,983 117,738,013 231,321,150
Time 225,658,046 404,007,515 382,898,853
---------------- ---------------- ---------------
Total deposits 370,934,157 567,859,681 668,024,961
Deposits held for sale 166,064,199 68,175,660 --
Note payable 5,499,999 6,000,000 --
Federal Home Loan Bank advances 46,000,000 47,850,000 52,350,000
Trust preferred securities 10,000,000 10,000,000 10,000,000
Other borrowed funds -- 7,000,000
Interest payable 2,903,799 2,971,448 3,380,770
Accounts payable - FDIC -- 18,378,054
Other liabilities 3,310,588 3,077,558 1,425,887
---------------- ---------------- ---------------
Total liabilities 604,712,742 705,934,347 760,559,672
---------------- ---------------- ---------------
COMMITMENTS AND CONTINGENT LIABILITIES
STOCKHOLDERS' EQUITY
Common stock, $2.50 stated value; authorized
10,000,000 shares; issued 4,575,702;
outstanding March 31, 2003 - 4,565,721,
December 31, 2002 - 4,565,721 and
March 31, 2002 - 4,564,513 shares 11,439,255 11,439,255 11,439,255
Additional paid-in capital 11,009,733 11,009,733 11,013,284
Retained earnings 19,203,843 13,904,212 28,112,189
Unearned employee stock ownership plan (ESOP) shares (281,447) (320,765) (460,909)
Accumulated other comprehensive income 595,138 664,911 374,242
Treasury stock, at cost
Common; March 31, 2003 - 9,981, December 31, 2002 -
9,981 and March 31, 2002 - 11,189 shares (315,014) (315,014) (331,938)
---------------- ---------------- ---------------
Total stockholders' equity 41,651,508 36,382,332 50,146,123
---------------- ---------------- ---------------
Total liabilities and stockholders' equity $ 646,364,250 $ 742,316,679 $ 810,705,795
================ ================ ===============
See notes to condensed consolidated financial statements (unaudited)
Note: The balance sheet at December 31, 2002 has been derived from the
audited consolidated financial statements at that date.
4
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002
---------------------------------------
INTEREST INCOME
Loans $ 8,790,024 $ 11,284,125
Securities
Taxable 811,477 1,351,698
Tax-exempt 39,925 103,476
Other 101,023 13,404
---------------- ---------------
Total interest income 9,742,449 12,752,703
---------------- ---------------
INTEREST EXPENSE
Deposits 3,839,800 5,454,468
Short-term borrowings 93,764 119,403
Federal Home Loan Bank advances 653,502 718,761
Junior subordinated debentures 265,000 265,000
---------------- ---------------
Total interest expense 4,852,066 6,557,632
---------------- ---------------
NET INTEREST INCOME 4,890,383 6,195,071
PROVISION FOR LOAN LOSSES 1,194,000 2,132,000
---------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,696,383 4,063,071
---------------- ---------------
NONINTEREST INCOME
Data service fees 2,223,184 1,738,864
Trust fees 671,502 712,882
Customer service fees 636,256 608,263
Net gains on loan sales 151,412 129,688
Net realized gains (losses) on sales of
available-for-sale securities 26,533 (80,706)
Loan servicing fees 117,453 105,614
Gain on sale of assets 8,035,912 1,627
Other 133,153 182,154
---------------- ---------------
Total noninterest income 11,995,405 3,398,386
---------------- ---------------
See notes to condensed consolidated financial statements (unaudited)
5
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (CONTINUED)
MARCH 31, MARCH 31,
2003 2002
---------------------------------------
NONINTEREST EXPENSE
Salaries and employee benefits $ 3,814,914 $ 3,867,691
Net occupancy expense 396,354 306,931
Equipment expense 1,059,154 882,531
Data processing fees 89,687 131,607
Professional fees 774,662 642,403
Marketing expense 100,854 108,817
Printing and office supplies 165,137 187,453
Telephone and communications 197,511 180,112
Postage and delivery expense 191,074 154,073
State, local and other taxes 158,399 160,335
Other 721,739 568,389
--------------- ---------------
Total noninterest expense 7,669,485 7,190,342
--------------- ---------------
INCOME BEFORE INCOME TAX 8,022,303 271,115
PROVISION FOR INCOME TAXES 2,722,672 64,566
--------------- ---------------
NET INCOME $ 5,299,631 $ 206,549
=============== ===============
BASIC EARNINGS PER SHARE $ 1.17 $ 0.05
=============== ===============
DILUTED EARNINGS PER SHARE $ 1.17 $ 0.05
=============== ===============
See notes to condensed consolidated financial statements (unaudited)
6
RURBAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS'
EQUITY (UNAUDITED)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2003 MARCH 31, 2002
TOTAL TOTAL
SHAREHOLDERS' SHAREHOLDERS'
EQUITY EQUITY
------------- --------------
Balance at beginning of period $ 36,382,332 $ 50,829,332
Net Income 5,299,631 206,549
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net (69,773) (347,609)
------------ ------------
Total comprehensive income (loss) 5,229,858 (141,060)
Cash dividends declared - (593,386)
Paydown of ESOP loan 39,318 51,237
------------ ------------
Balance at end of period $ 41,651,508 $ 50,146,123
============ ============
See notes to condensed consolidated financial statements (unaudited)
7
RURBAN FINANCIAL CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
THREE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2002
---------------------------------------
OPERATING ACTIVITIES
Net income $ 5,299,631 $ 206,549
Adjustments to reconcile net income to net
cash provided by operating activities
Depreciation and amortization 608,682 529,647
Provision for loan losses 1,194,000 2,132,000
ESOP shares earned 39,318 51,237
Amortization of premiums and discounts
on securities 166,683 3,392
Amortization of intangible assets 107,554 45,992
Deferred income taxes 98,499 --
Proceeds from sale of loans held for 2,463,510
sale 13,479,405
Originations of loans held for sale (13,327,993) (1,979,466)
Gain on sale of branch
(8,009,437) --
Gain from sale of loans (151,412) (129,688)
Gain on sales of fixed assets (28,948) (129,688)
Net realized (gains) losses on
available-for-sale securities (26,533) 80,706
Changes in
Interest receivable 1,316,852 (47,142)
Other assets 6,344,040 (2,221,440)
Interest payable and other liabilities 168,900 (475,671)
--------------- ---------------
Net cash provided by (used in)
operating activities 7,279,241 660,166
--------------- ---------------
INVESTING ACTIVITIES
Net change in interest-bearing deposits (50,000) (385,053)
Purchases of available-for-sale securities (34,522,183) (12,530,758)
Proceeds from maturities of
available-for-sale securities 41,989,452 14,183,825
Proceeds from the sales of
available-for-sale securities 8,334,056 1,923,320
Net change in loans 42,721,729 (8,760,538)
Purchase of premises and equipment (486,572) (882,531)
Purchase of Federal Home Loan Federal
Reserve Bank stock (31,200) (32,700)
Sale of foreclosed assets (49,514) --
Payment of assumption of liability from
sale of branch (4,707,772) --
Proceeds from assumption of net
liabilities in business acquisition -- 58,240,077
--------------- ---------------
Net cash provided by (used in)
investing activities 53,197,996 51,755,642
--------------- ---------------
8
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
MARCH 31, MARCH 31,
2003 2002
-----------------------------------
FINANCING ACTIVITIES
Net increase (decrease) in demand deposits,
money market, NOW and savings accounts $ 37,025,646 $ (1,077,376)
Net decrease in certificates of deposit (65,231,885) (34,898,119)
Net decrease in federal funds purchased -- (14,850,000)
Repayment of Federal Home Loan Bank advances (1,850,000) (1,925,069)
Proceeds (repayments) of note payable (500,001) 7,000,000
Dividends paid -- (1,186,773)
Net cash used in financing activities (30,556,240) (46,937,337)
--------------- ----------------
INCREASE IN CASH AND CASH EQUIVALENTS 29,920,997 6,910,326
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 51,018,337 18,431,717
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 80,939,334 $ 25,342,043
=============== ===============
SUPPLEMENTAL CASH FLOWS INFORMATION
Interest paid $ 4,707,792 $ 6,807,485
Income taxes paid (net of refunds) (4,252,322) --
See notes to condensed consolidated financial statements (unaudited)
9
(Continued)
RURBAN FINANCIAL CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE A--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions for Form 10-Q. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements.
For further information, refer to the consolidated financial statements and
footnotes included in the Corporation's Annual Report on Form 10-k for the year
ended December 31, 2002.
NOTE B--EARNINGS PER SHARE
Earnings per share have been computed based on the weighted average number of
shares outstanding during the periods presented. For the three months ended
March 31, 2003 and 2002, stock options totaling 223,376 and 206,549 shares of
common stock were not considered in computing EPS as they were anti-dilutive.
The number of shares used in the computation of basic and diluted earnings per
share was:
Three Months Ended
March 31,
---------
2003 2002
---- ----
Basic earnings per share 4,545,162 4,538,155
Diluted earnings per share 4,545,162 4,557,370
NOTE C - LOANS, RISK ELEMENTS AND ALLOWANCE FOR LOAN LOSSES
Total loans on the balance sheet are comprised of the following classifications
at:
March 31, December 31,
2003 2002
---- ----
Commercial $ 85,155,609 $ 123,053,492
Commercial real estate 110,102,184 129,718,943
Agricultural 55,358,427 68,953,865
Residential real estate 53,879,447 84,431,599
Consumer 43,263,920 60,138,463
Lease financing 18,444,060 21,509,394
---------------- ----------------
Total loans 366,203,647 487,805,756
Less
Net deferred loan fees, premiums and discounts (273,756) (331,130)
Allowance for loan losses (13,491,372) (17,693,841)
----------------- -----------------
Net loans $ 352,438,519 $ 469,780,785
10
(Continued)
The following is a summary of the activity in the allowance for loan losses
account for the three months ended March 31, 2003 and 2002 and the year ended
December 31, 2002.
March 31, December 31, March 31,
2003 2002 2002
---- ---- ----
Balance, beginning of year $ 17,693,841 $ 9,238,936 $ 9,238,936
Amounts assumed in acquisition -- 1,427,000 1,427,000
Sales of Citizens Banking Co. (232,000) -- --
Provision charged to expense 1,194,000 27,530,583 2,132,000
Recoveries 487,727 1,270,773 348,361
Loans charged off (5,652,196) (21,773,451) (507,782)
---------------- ---------------- --------------
Balance, end of year $ 13,491,372 $ 17,693,841 $ 12,638,515
=============== =============== ===============
The following schedule summarizes nonaccrual, past due and impaired loans at:
March 31, December 31,
2003 2002
---- ----
Loans accounted for on a nonaccrual basis $ 16,548,000 $ 18,259,000
Accruing loans which are contractually
past due 90 days or more as to interest or
principal payments 4,404,000 476,000
--------------- ---------------
Total non-performing loans $ 20,952,000 $ 18,735,000
=============== ===============
Individual loans determined to be impaired were as follows:
March 31, December 31,
2003 2002
---- ----
Loans with no allowance for loan losses allocated $ 1,050,000 $ 1,186,000
Loans with allowance for loan losses allocated 17,175,000 13,736,000
--------------- ---------------
Total impaired loans $ 18,225,000 $ 14,922,000
=============== ===============
Amount of allowance allocated $ 4,895,000 $ 5,067,000
=============== ===============
11
(Continued)
NOTE D - TRUST PREFERRED SECURITIES
On September 7, 2000, Rurban Statutory Trust 1 ("RST"), a wholly owned
subsidiary of the Company closed a pooled private offering of 10,000 Capital
Securities with a liquidation amount of $1,000 per security. The proceeds of the
offering were loaned to the Company in exchange for junior subordinated
debentures with terms similar to the Capital Securities. The sole assets of RST
are the junior subordinated debentures of the Company and payments thereunder.
The junior subordinated debentures and the back-up obligations, in the
aggregate, constitute a full and unconditional guarantee by the Company of the
obligations of RST under the Capital Securities. Distributions on the Capital
Securities are payable semi-annually at the annual rate of 10.6% and are
included in interest expense in the consolidated financial statements. These
securities are considered Tier 1 capital (with certain limitations applicable)
under current regulatory guidelines. As of March 31, 2003, December 31, 2002 and
March 31, 2002, the outstanding principal balance of the Capital Securities was
$10,000,000.
The junior subordinated debentures are subject to mandatory redemption, in whole
or in part, upon repayment of the Capital Securities at maturity or their
earlier redemption at the liquidation amount. Subject to the Company having
received prior approval of the Federal Reserve, if then required, the Capital
Securities are redeemable prior to the maturity date of September 7, 2030, at
the option of the Company; on or after September 7, 2010 at a premium, or on or
after September 7, 2020 at par; or upon occurrence of specific events defined
within the trust indenture. The Company has the option to defer distributions on
the Capital Securities from time to time for a period not to exceed 10
consecutive semi-annual periods.
On February 12, 2003, the Trustee was notified that the Company elected to defer
the semi-annual distributions which would have been due on March 7, 2003, until
September 7, 2003.
NOTE E - NOTE PAYABLE
The Company has a note payable to The Northern Trust Company of $5,499,999,
secured by stock in the Company's subsidiaries, payable in equal monthly
principal installments of $166,667 together with interest at a variable rate.
Final payment is due June 30, 2003.
The stock of the Banks and RDSI is pledged as security for the note. The Company
has negotiated with the lender to extend the maturity of the note to June 30,
2003 and plans to refinance the note with another lender as part of the
financing of a loan subsidiary to be created upon the sale of RFCBC's deposits,
branches, and performing loans.
NOTE F - REGULATORY MATTERS
The Company and the subsidiary banks are subject to various regulatory capital
requirements administered by the federal and state banking agencies. Failure to
meet minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators, if undertaken, could have a
direct material effect on the Company's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Company and the subsidiary banks must meet specific capital guidelines that
involve quantitative measures of assets, liabilities and certain
off-balance-sheet items as calculated under regulatory
12
(Continued)
accounting practices. The capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings and
other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and the subsidiary banks to maintain minimum amounts and
ratios (set forth in the table below) of total and Tier I capital (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier I capital (as
defined) to average assets (as defined). Management believes, as of March 31,
2003, the Company and the subsidiary banks meet all "well-capitalized"
requirements to which they are subject.
13
(Continued)
The Company and significant subsidiary banks' actual capital amounts (in
millions) and ratios are also presented in the following table.
TO BE WELL CAPITALIZED
FOR CAPITAL ADEQUACY UNDER PROMPT CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
--------------------------------------------------------------------------------
As of March 31, 2003
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 53.8 11.8% $ 43.0 8.0% $ -- N/A
State Bank 36.1 10.8 28.5 8.0 35.6 10.0
RFCBC 19.1 15.9 14.6 8.0 18.2 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 48.1 10.5 21.5 4.0 -- N/A
State Bank 31.9 9.6 14.3 4.0 21.4 6.0
RFCBC 17.6 14.6 7.3 4.0 10.9 6.0
Tier I Capital
(to Average Assets)
Consolidated 48.1 6.7 31.7 4.0 N/A
State Bank 31.9 7.2 19.1 4.0 23.8 5.0
RFCBC 17.6 6.6 11.7 4.0 14.6 5.0
As of December 31, 2002
Total Capital
(to Risk-Weighted Assets)
Consolidated $ 49.4 9.2% $ 43.0 8.0% $ -- N/A
State Bank 36.2 10.2 28.5 8.0 35.6 10.0
RFCBC 14.8 8.1 14.6 8.0 18.2 10.0
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 42.6 7.9 21.5 4.0 -- N/A
State Bank 31.7 8.9 14.3 4.0 21.4 6.0
RFCBC 12.4 6.8 7.3 4.0 10.9 6.0
Tier I Capital
(to Average Assets)
Consolidated 42.6 5.4 31.7 4.0 N/A
State Bank 31.7 6.7 19.1 4.0 23.8 5.0
RFCBC 12.4 4.2 11.7 4.0 14.6 5.0
14
(Continued)
NOTE G - CONTINGENT LIABILITIES
There are various contingent liabilities that are not reflected in the
consolidated financial statements, including claims and legal actions arising in
the ordinary course of business. In the opinion of management, after
consultation with legal counsel, the ultimate disposition of these matters is
not expected to have a material effect on the Corporation's consolidated
financial condition or results of operations.
NOTE H - NEW ACCOUNTING PRONOUNCEMENTS
On November 25, 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45)
which expands on the accounting guidance of Statements No. 5, 57 and 107 and
incorporates without change the provisions of FASB Interpretation No. 34, which
is being superseded.
FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure of,
guarantees. Each guarantee meeting the characteristics described in FIN No. 45
is to be recognized and initially measured at fair value, which will be a change
from current practice for most entities. In addition, guarantors will be
required to make significant new disclosures, even if the likelihood of the
guarantor making payments under the guarantee is remote, which represents
another change from current general practice.
FIN No. 45's disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
changed its method of accounting and financial reporting for standby letters of
credit by adopting the provisions of FIN No. 45 effective January 1, 2003. There
was no material impact of the adoption on the financial statements.
NOTE I - BRANCH SALES
On December 30, 2002, an agreement was signed to sell the branches of RFCBC
which comprise the Citizens Savings Bank division to the Union Banking Company.
The sale was closed March 28, 2003. As of March 28, 2003, these branches had
total loans of $57,175,622, total fixed assets (net of accumulated depreciation)
of $869,459 and total deposits of $70,830,746. A pre-tax gain of approximately
$8.0 million was recorded in March 2003 from the sale.
On February 22, 2003, an agreement was signed to sell the branches, deposits and
certain performing loans of the Peoples Banking Company and First Bank of Ottawa
divisions of RFCBC to First Federal Bank of the Midwest at a price substantially
in excess of their book value. Under the agreement, First Federal of the Midwest
would acquire loans (including accrued interest) of approximately $116 million,
total fixed assets (net of accumulated depreciation) of approximately $1.5
million and total deposits (including accrued interest) of approximately $177
million. The transaction is expected to close in June 2003.
15
(Continued)
NOTE J - STOCK OPTIONS
The Company accounts for its stock option plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under those plans had an
exercise price equal to the market value of the underlying common stock on the
grant date. The following table illustrates the effect on net income and
earnings per share if the Company had applied the fair value provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation.
Three Months Ended March 31,
2003 2002
---------- --------
Net income, as reported $5,299,631 $206,549
Less: Total stock-based employee compensation
cost determined under the fair value based
method, net of income taxes (19,823) (19,661)
--------- -------
Pro forma net income $5,279,808 $186,888
========== ========
Earnings per share:
Basic - as reported $1.17 $.05
Basic - pro forma $1.16 $.04
Diluted - as reported $1.17 $.05
Diluted - proforma $1.16 $.04
NOTE K - COMMITMENTS AND CREDIT RISK
Loan commitments and unused lines of credit totaled $75,513,000, standby letters
of credit totaled $799,700 and commercial letters of credit totaled $11,000 as
of March 31, 2003.
NOTE L - SEGMENT INFORMATION
The reportable segments are determined by the products and services offered,
primarily distinguished between banking and data processing operations. Other
segments include the accounts of the holding company, Rurban Financial Corp.,
which provides management and operational services to its subsidiaries; Reliance
Financial Services, N.A., which provides trust and financial services to
customers nationwide; Rurban Life, which provides insurance products to
customers of the Corporation's subsidiary banks; and Rurban Statutory Trust 1,
which manages the Corporation's junior subordinated debentures. Information
reported internally for performance assessment follows.
16
(Continued)
NOTE L -- SEGMENT INFORMATION (Continued)
As of and for the three months ended March 31, 2003
Data Total Intersegment Consolidated
Banking Processing Other Segments Elimination Totals
-----------------------------------------------------------------------------------------
Income statement information:
- ---------------------------------------
Net interest income (expense) $ 5,324,433 $ (78,750) $(349,110) $ 4,896,572 $ (6,189) $ 4,890,383
Noninterest income - external
customers 9,082,682 2,223,184 689,539 11,995,405 - 11,995,405
Noninterest income - other segments - 477,575 1,488,701 1,966,276 (1,966,276) -
----------- --------- ---------- ---------- ----------- ----------
Total revenue 14,407,115 2,622,009 1,829,130 18,858,253 (1,972,465) 16,885,788
Noninterest expense 5,747,987 2,052,295 1,835,479 9,635,761 (1,966,276) 7,669,485
Significant non-cash items:
Depreciation and
amortization 234,047 364,038 43,754 641,839 - 641,839
Provision for loan losses (1,194,000) - - (1,194,000) - (1,194,000)
-
Income tax expense (benefit) 2,533,150 193,702 (4,180) 2,722,672 - 2,722,672
-
Segment profit (loss) 4,931,980 376,011 (8,360) 5,299,631 - 5,299,631
Balance sheet information:
- ---------------------------------------
Total assets 643,164,713 9,382,393 3,160,124 655,707,230 (9,342,980) 646,364,250
Goodwill and intangibles 2,986,866 - - 2,986,866 - 2,986,866
Premises and equipment
expenditures, net (782,164) 457,606 (162,014) (486,572) - (486,572)
17
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
----------------------------------------------------------
Certain statements within this document which are not statements of historical
fact constitute forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Forward-looking statements involve
risks and uncertainties and actual results may differ materially from those
predicted by the forward-looking statements. These risks and uncertainties
include, but are not limited to, risks and uncertainties inherent in the
national and regional banking, insurance and mortgage industries, competitive
factors specific to markets in which Rurban and its subsidiaries operate, future
interest rate levels, legislative and regulatory actions, capital market
conditions, general economic conditions, geopolitical events, the loss of key
personnel and other factors.
Forward-looking statements speak only as of the date on which they are made, and
Rurban undertakes no obligation to update any forward-looking statement to
reflect events or circumstances after the date on which the statement is made.
All subsequent written and oral forward-looking statements attributable to
Rurban or any person acting on our behalf are qualified by these cautionary
statements.
18
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Rurban Financial Corp. ("Rurban") or ("the Company") was incorporated on
February 23, 1983, under the laws of the State of Ohio. Rurban is a bank holding
company registered with the Federal Reserve Board under the Bank Holding Company
Act of 1956, as amended. Rurban's subsidiaries, The State Bank and Trust Company
("State Bank") and RFC Banking Company ("RFCBC") are engaged in the industry
segment of commercial banking. RFCBC was created June 30, 2001 through the
merger of The Peoples Banking Company, The First National Bank of Ottawa and The
Citizens Savings Bank Company, which were wholly owned subsidiaries of Rurban
prior to the merger, and now operate as separate divisions. Rurban's subsidiary,
Rurbanc Data Services, Inc. ("RDSI"), provides computerized data processing
services to community banks and businesses including Rurban's subsidiary banks.
Rurban's subsidiary, Rurban Life Insurance Company ("Rurban Life") has a
certificate of authority from the State of Arizona to transact insurance as a
domestic life and disability insurer. Rurban's subsidiary, Rurban Statutory
Trust I ("RST") was established in September 2000 for the purpose of managing
the Company's junior subordinated debentures. Reliance Financial Services, N.A.
("Reliance"), a wholly owned subsidiary of State Bank, provides trust and
financial services to customers nationwide.
The following discussion is intended to provide a review of the consolidated
financial condition and results of operations of Rurban. This discussion should
be read in conjunction with the consolidated financial statements and related
footnotes in Rurban's 2002 Form 10-K filed with the Securities and Exchange
Commission.
This section may contain statements that are forward-looking as defined by the
Securities and Exchange Commission in its rules, regulations and releases. The
Company intends that such forward-looking statements be subject to the safe
harbors created thereby. All forward-looking statements are based on current
expectations regarding important risk factors including those identified in the
Company's most recent periodic report and other filings with the Securities and
Exchange Commission. Accordingly, actual results may differ materially from
those expressed in the forward-looking statements, and the making of such
statements should not be regarded as a representation by the Company, or any
other person, that the results expressed therein will be achieved.
QUARTERLY EARNINGS SUMMARY
Net income for the quarter was $5.3 million, or $1.17 per diluted share, versus
$0.21 million, or $0.05 per diluted share, for the first quarter 2002.
Net interest income declined $1.3 million to $4.9 million for the three months
ended March 31, 2003 compared to $6.2 million for the first quarter 2002. The
decline in net interest income is partially due to a lower level of average
earning assets, declining market rates, a higher level of non-accrual loans and
increased balance sheet liquidity as the Company focused on strengthening its
risk based capital ratios. The decline is also driven by a $276.0 million
decrease in loans. This decline in loans is due to an increase in loans held for
sale, branch sales, reduced new loan demand and chargeoffs.
The provision for loan losses of $1.2 million for the first quarter of 2003
decreased $0.9 million (44%) compared to the first three months of 2002.
19
Noninterest income increased $8.6 million to $12.0 million in the first quarter
of 2003 compared to $3.4 million for the first three months of 2002. The
increase in noninterest income was mainly the result of the sale of the Citizens
Savings Bank, a division of RFC Banking Company, on March 28, 2003 for a pre-tax
gain of $8.0 million.
Noninterest expense increased $0.5 million to $7.7 million for the first quarter
of 2003 compared to $7.2 million for the first three months of 2002. This
increase is the result of RDSI purchasing BancServ in May 2002 and Northwest
Financial in August 2002 increasing equipment expense in the first quarter of
2003 and professional fees increased $132,000 as a result of increased
attorney/consulting fees related to loan workouts, foreclosures and branch
divestitures.
LINKED QUARTER COMPARISON
The Company reported a net profit for the first quarter of 2003 of $5.3 million,
or $1.17 per diluted share, versus a net loss of $6.1 million, or $1.35 per
diluted share, for the fourth quarter of 2002. The first quarter profit was
mainly due to the sale of the Citizens Savings Bank, a division of RFC Banking
Company, on March 28, 2003 for a pre-tax gain of approximately $8.0 million. The
fourth quarter loss was driven largely by the loan loss provision of $11.5
million, bringing the total loan loss provision for 2002 to $27.5 million and
the allowance for loan losses to $17.7 million or 3.21% at December 31, 2002.
Net interest income decreased $333,000 or 6% to $4.9 million for the three
months ended March 31, 2003 compared to $5.2 million for the fourth quarter of
2002. This decrease was largely due to a $1.2 million decline in loan interest
income in the first quarter.
A comparison of financial results for the quarter ended March 31, 2003 to the
previous quarter ended December 31, 2002 is as follows:
Three Months Ended Linked Quarter Annualized
03/31/03 12/31/02 % Change % Change
-------- -------- -------- --------
(dollars in millions, except per share data)
Total Assets $ 646 $ 742 -13% -52%
Loans Held for Sale 79.8 63.5 26% 104%
Loans (Gross) 366 488 -25% -101%
Allowance for Loan Losses 13.5 17.7 -24% -96%
Total Deposits 371 568 -35% -141%
Total Revenue 16.9 10.0 69% 280%
Net interest Income 4.9 5.2 -6% -23%
Loan Loss Provision 1.2 11.5 -90% -363%
Noninterest Income 12.0 4.8 149% 608%
Noninterest Expense 7.7 7.8 -2% -5%
Net Income 5.3 (6.1) -- --
Basic Earnings Per Share $1.17 $(1.35) -- --
Diluted Earnings Per Share $1.17 $(1.35) -- --
On a linked quarter basis, loans declined $122 million while loans held for sale
increased $16.3 million and total assets declined $96 million. The decline in
loans was primarily due to the sale of Citizens Savings Bank resulting in the
sale of $56.6 million in loans, an increase of $16.3 million in loans held for
sale, and the additional sales of FSA, SBA loans. Additional reductions in loan
20
balances were due to residential loan refinancings and the Company's intended
low level of production of new commercial loans.
TOTAL REVENUE
Three Months Ended
03/31/03 12/31/02 $Change %Change
----------------------------------------------
(dollars in thousands)
Total Revenue $16,886 $10,031 $6,855 69%
Total revenue (net interest income plus noninterest income) was $16.9 million
for the first quarter of 2003 compared to $10.0 million for the fourth quarter
of 2002, up $6.9 million or 69%.
NET INTEREST INCOME
Three Months Ended
03/31/03 12/31/02 $Change %Change
------------------------------------------
(dollars in thousands)
Net Interest Income $4,890 $5,223 $(333) -6%
Net interest income for the first quarter of 2003 was $4.9 million compared to
$5.2 million for the fourth quarter of 2002. The net interest margin for the
first quarter of 2003 was 2.92% compared to 2.81% for the previous quarter.
LOAN LOSS PROVISION
The provision for loan losses of $1.2 million for the first quarter of 2003
decreased $10.3 million compared to the fourth quarter of 2002. The reasons for
the decrease in the first quarter are discussed in the "Allowance for Loan
Losses" section.
NONINTEREST INCOME
Three Months Ended
03/31/03 12/31/02 $Change %Change
-------------------------------------------
(dollars in thousands)
Total Noninterest Income $11,995 $4,808 $7,187 149%
- Gains on Sale of Assets 8,036 (64) +8,100 -
- Data Service Fees 2,223 2,195 +28 1%
- Deposit Service Fees 636 693 -57 -8%
- Gains on Sale of Loans 151 399 -248 -62%
- Gain (Loss) on Securities 27 849 -822 -97%
Noninterest income increased by $7.2 million to $12.0 million in the first
quarter of 2003. The first quarter increase was the result of the sale of
Citizens Savings Bank resulting in an approximate premium of $8.0 million
recorded in gain on sale of assets.
21
RURBANC DATA SERVICES, INC. ("RDSI")
THREE MONTHS ENDED
03/31/03 12/31/02 $ Change % Increase
------------------------------------------------
(Dollars in Thousands)
Data Processing Fees $2,223 $2,195 $28 1%
RDSI's continued growth in network services, Internet banking and other
technical services accounts for the majority of its revenue growth.
NONINTEREST EXPENSE
Three Months Ended
03/31/03 12/31/02 $Change %Change
--------------------------------------------
(dollars in thousands)
Total Noninterest Expense $7,669 $7,848 $(178) -2%
- Salaries & Employee Benefits 3,815 3,997 (182) -5%
- Equipment Expense 1,059 1,107 (47) -4%
- Professional Fees 775 863 (88) -10%
- All Other 2,020 1,881 +139 +7%
Noninterest expense for the first quarter of 2003 was $7.7 million compared to
$7.8 million for the fourth quarter of 2002, a reduction of $178,000 or 2%.
LOANS
Inc
% of As Of % of ---
03/31/03 Total 12/31/02 Total (Dec)
-------- ----- -------- ----- -----
(dollars in millions)
Commercial $ 85 23% $123 25% $ (38)
Commercial real estate 110 30% 130 27% (20)
Agricultural 55 15% 69 14% (14)
Residential 54 15% 84 17% (30)
Consumer 43 12% 60 12% (17)
Leasing loans 19 5% 22 5% (3)
---- ---- -----
Total $366 $488 $(122)
Loans held for sale 80 63 17
---- ---- -----
Total $446 $551 $(105)
Loans decreased $122 million to $366 million at March 31, 2003. The decline in
loans was primarily due to the sale of Citizens Savings Bank resulting in $56.6
million of loans being sold, an increase of $16.3 million in loans held for
sale, and the additional sales of FSA, SBA loans. Additional
22
reductions in loan balances were due to residential loan refinancings and the
Company's intended low level of production of new commercial loans.
Commercial, commercial real estate, agricultural, residential, consumer and
leasing loans for the quarter declined 31%, 15%, 20%, 36%, 28% and 14%,
respectively, as loan demand has softened and the Company's new lending efforts
have become focused on smaller local relationships. At March 31, 2003,
commercial, commercial real estate, agricultural, residential, consumer and
leasing loans represented 23%, 30%, 15%, 15%, 12% and 5%, respectively, of total
loans, compared to 25%, 27%, 14%, 17%, 12% and 5% at December 31, 2002.
ASSET QUALITY
As Of And For The Quarter Ended
-------------------------------
(dollars in millions)
03/31/03 12/31/02 Change
-------- -------- ------
Non-performing loans $21.0 $18.7 $+2.3
Non-performing assets 23.6 20.8 +2.8
Nonperforming assets/ loan plus OREO 6.41% 4.25% +2.16%
Nonperforming assets/ total assets 3.65% 2.80% +.85%
Net chargeoffs 5.2 14.7
Net chargeoffs (annualized)/ total loans 4.7% 12%
Loan loss provision 1.2 11.5
Allowance for loan loss - $ 13.5 17.7 -4.2
Allowance for loan loss - % 3.03% 3.21% -.18
Allowance/nonperforming loans 64% 95% --
Allowance/nonperforming assets 57% 85% --
Non-performing assets at March 31, 2003 increased to $23.6 million or 3.65% of
total assets, versus $20.8 million, or 2.80% at December 31, 2002, an increase
of $2.8 million. Net chargeoffs for the first quarter of 2003 were $5.2 million
compared to $14.7 million in the fourth quarter of 2002.
ALLOWANCE FOR LOAN LOSSES
The Company grades its loans using a eight grade system. Problem loans are
classified as either:
Substandard: Inadequately protected, with well-defined weakness that
jeopardize liquidation of debt
Doubtful: Inherent weaknesses well-defined and high probability of loss
(impaired)
Loss: Considered uncollectible. May have recovery or salvage value with
future collection efforts (these loans are either fully reserved or
charged off)
23
The Company's allowance for loan losses has four components. Those components
are shown in the following table:
----------03/31/03---------- -----------12/31/02--------
ALLOCATION ALLOCATION
LOAN --------------- LOAN --------------
BALANCE $ % BALANCE $ %
------- ----- ----- ------- ----- -----
Allocations for individual
commercial loans graded doubtful
(impaired) $ 18.2 $ 4.9 34.23% $ 14.9 $ 5.1 34.23%
Allocations for individual
commercial loans graded substandard 44.6 6.0 11.44 57.7 6.6 11.44
"General" allowance based on
chargeoff history of nine
categories of loans 347.2 1.5 1.09 478.7 5.2 1.09
Allocation based on special mention
loan balance 36.0* 1.1 -- -- 0.8 --
------ ----- ----- ------ ----- -----
TOTAL $446.0 $13.5 3.03% $551.3 $17.7 3.21%
* The allocation calculation for special mention loans was revised in the first
quarter of 2003. The special mention allocation is now computed using 3% of the
special mention loan balance whereas in the previous quarters, it was based on
risk factors.
The amount of loans classified as doubtful increased $3.3 million to $18.2
million while substandard loans decreased $13.1 million to $44.6 million.
Allowance allocations on doubtful loans decreased $0.2 million while allowance
allocations on substandard loans decreased $0.6 million from December 31, 2002.
The allowance for loan losses at March 31, 2003 was $13.5 million or 3.03% of
loans compared to $17.7 million or 3.21% at December 31, 2002.
CAPITAL RESOURCES
At March 31, 2003, actual capital levels (in millions) and minimum required
levels were:
Minimum Required
Minimum Required To Be Well Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
--------------------- ------------------- --------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
Total capital (to risk weighted assets)
Consolidated $ 53.8 11.8% $ 43.0 8.0% $ - N/A
State Bank 36.1 10.8 28.5 8.0 35.6 10.0
RFC Banking Company 19.1 15.9 14.6 8.0 18.2 10.0
The Company, State Bank and RFCBC were categorized as well capitalized at March
31, 2003.
WRITTEN AGREEMENT
On July 9, 2002, the Company and State Bank announced they entered into a
Written Agreement ("Agreement") with the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial
24
Institutions on July 5, 2002. The Agreement was the result of an examination of
State Bank as of December 31, 2001, which was conducted in March and April 2002.
The results of the November 4, 2002 regulatory examinations indicated that as of
that date, Rurban and State Bank were in compliance with most provisions of the
Agreement. Management expects to be in substantial compliance with each of the
provisions of the Agreement by mid-2003.
The Company and RFCBC have been advised by RFCBC's regulators, the FDIC and the
Ohio Division of Financial Institutions, that the preliminary results of the
November 4, 2002 examination of RFCBC indicated that the Bank may be presented
with a formal agreement based on concerns raised. RFCBC's December 31, 2002
total risk-based capital ratio was 8.1%, above the "adequately capitalized"
minimum of 8%. The closing of the sale of the Citizens division improved the
total risk-based capital ratio to approximately 16%.
State Bank and RFCBC are prohibited from paying dividends to Rurban without
prior regulatory approval. Rurban is prohibited from paying Trust Preferred
"dividends" and common stock dividends without prior regulatory approval.
GOALS FOR 2003 AND 2004
The Company's near term goals include:
-- Focus on the quality of the loan underwriting process
-- Closing of the purchase and assumption agreements for the sale of
the remaining RFC Banking Company branches
-- Establishment of a loan subsidiary to manage the workout process
for problem loans
-- Continued focus on Customer Relationship Management (CRM)
-- Completion of the centralization of operations functions
-- Implementation of all corrective actions necessary to achieve the
release from the Written Agreement
-- Restoring earnings to a level sufficient to resume the payment of
a dividend
LIQUIDITY
Liquidity relates primarily to the Company's ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, interest
earning deposits in other financial institutions, securities available-for sale
and loans held for sale. These assets are commonly referred to as liquid assets.
Liquid assets were $200.9 million at March 31, 2003 compared to $235.9 million
at December 31, 2002.
The Company's residential first mortgage portfolio of $53.9 million at March 31,
2003 and $84.4 million at December 31, 2002, which can and has been readily used
to collateralize borrowings, is an additional source of liquidity. Management
believes its current liquidity level is sufficient to meet its liquidity needs.
At March 31, 2003, all eligible mortgage loans were pledged under an a Federal
Home Loan Bank ("FHLB") blanket lien.
The cash flow statements for the periods presented provide an indication of the
Company's sources and uses of cash as well as an indication of the ability of
the Company to maintain an adequate level of liquidity. A discussion of the cash
flow statements at March 31, 2003 and 2002 follows.
25
The Company experienced a net increase in cash from operating activities at
March 31, 2003 and 2002. Net cash from operating activities was $7.3 million and
$0.7 million, respectively, at March 31, 2003 and 2002.
Net cash flow from investing activities was $53.2 million and $51.8 million at
March 31, 2003 and 2002 respectively. The changes in net cash from investing
activities at March 31, 2003 include a decrease in securities of $(15.8)
million, a decrease in loans of $(42.7) million, a decrease from the sale of
Citizens Banking Company branches of $(4.7) million as well as changes in
interest-bearing deposits, purchases of premises and equipment and other
investing activities. The changes in net cash from investing activities at March
31, 2002 include increases in loans of $8.8 million, decrease in securities of
$(3.6) million and the purchase of net liabilities from the Oakwood acquisition
of $58.2 million.
Net cash flow from financing activities was $(30.6) million and $(46.9) million
at March 31, 2003 and 2002, respectively. The net cash decrease was primarily
due to a reduction in total deposits of $(28.2) million at March 31, 2003
compared to $(36.0) at March 31, 2002. Other changes included decreases in
Federal Home Loan Bank (FHLB) advances of $(1.9) million and a note payable
decrease of $(0.5) million at March 31, 2003 compared to a $(1.9) decrease in
FHLB advances, an increase of $7.0 million for a note payable and payment of
dividends of $(1.2) million at March 31, 2002.
OFF-BALANCE-SHEET BORROWING ARRANGEMENTS:
Significant additional off-balance-sheet liquidity is available in the form of
FHLB advances, unused federal funds lines from correspondent banks, and the
national certificate of deposit market. While such additional off-balance-sheet
liquidity is available, the Written Agreement between Rurban, State Bank, the
Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions requires Rurban and State Bank to obtain written approval of the
Federal Reserve Bank of Cleveland and the Ohio Division of Financial
Institutions prior to directly or indirectly incurring any debt.
Approximately $36.7 million residential first mortgage loans of the Company's
$53.9 million portfolio qualify to collateralize FHLB borrowings and have been
pledged to meet FHLB collateralization requirements as of March 31, 2003. In
addition to residential first mortgage loans, $10.9 million in investment
securities and $19.0 million in overnight deposits are pledged to meet FHLB
collateralization requirements. Based on the current collateralization
requirements of the FHLB, approximately $3.5 million of additional borrowing
capacity existed at March 31, 2003. Subsequent to 2002year-end, all loans
originated at RFC Banking Company were designated as held for sale and no longer
qualified as collateral for FHLB advances. These loans have been replaced with
investment securities to meet FHLB collateralization requirements.
As of March 31, 2003, the Company had unused federal funds lines totaling
approximately $14.0 million from two correspondent bank. At December 31, 2002,
the Company had unused federal funds lines totaling approximately $26.0 million
from two correspondent banks. Federal funds borrowed were $0 at March 31, 2003
and December 31, 2002.
Approximately $12.5 million performing commercial loans are pledged to the
Federal Reserve Discount Window to establish additional borrowing capacity of
$8.8 million. Such loans are pledged for contingency funding purposes and to
date this borrowing capacity has not been used. Totals do not include $5 million
in securities pledged for daylight overdraft (Payments System Risk).
26
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
--------------------------------------------------------------------------------
PAYMENT DUE BY PERIOD
--------------------------------------------------------------------------------
LESS MORE
THAN 1 1 - 3 3 - 5 THAN 5
TOTAL YEAR YEARS YEARS YEARS
--------------------------------------------------------------------------
Contractual Obligations
- -----------------------
Long-Term Debt Obligations $45,500,000 $0 $5,000,000 $0 $40,500,000
Other Debt Obligations 15,999,999 15,999,999
Capital Lease Obligations 0 0 0 0 0
Operating Lease Obligations 896,400 99,600 199,200 199,200 398,400
Purchase Obligations 0 0 0 0
Other Long-Term Liabilities
Reflected on the Registrant's
Balance Sheet under GAAP 0 0 0 0 0
--------------------------------------------------------------------------------
Total $62,396,399 $16,099,599 $5,199,200 $199,200 $40,898,400
-----
The Company's contractual obligations as of March 31, 2003 were comprised of
long-term debt obligations, other debt obligations and operating lease
obligations. The long-term debt obligations were comprised of FHLB advances
and Trust Preferred securities. Other debt obligations include additional FHLB
advances and the note payable to Northern Trust. The operating lease
obligation is a lease on the RDSI building of $99,600 a year.
ASSET LIABILITY MANAGEMENT
Asset liability management involves developing and monitoring strategies to
maintain sufficient liquidity, maximize net interest income and minimize the
impact that significant fluctuations in market interest rates would have on
earnings. The business of the Company and the composition of its balance sheet
consists of investments in interest-earning assets (primarily loans,
mortgage-backed securities, and securities available for sale) which are
primarily funded by interest-bearing liabilities (deposits and borrowings). With
the exception of loans which are originated and held for sale, all of the
financial instruments of the Company are for other than trading purposes. All of
the Company's transactions are denominated in U.S. dollars with no specific
foreign exchange exposure. In addition, the Company has limited exposure to
commodity prices related to agricultural loans. The impact of changes in foreign
exchange rates and commodity prices on interest rates are assumed to be
insignificant. The Company's financial instruments have varying levels of
sensitivity to changes in market interest rates resulting in market risk.
Interest rate risk is the Company's primary market risk exposure; to a lesser
extent, liquidity risk also impacts market risk exposure.
Interest rate risk is the exposure of a banking institution's financial
condition to adverse movements in interest rates. Accepting this risk can be an
important source of profitability and stockholder value; however, excessive
levels of interest rate risk could pose a significant threat to the Company's
earnings and capital base. Accordingly, effective risk management that maintains
interest rate risks at prudent levels is essential to the Company's safety and
soundness.
Evaluating a financial institution's exposure to changes in interest rates
includes assessing both the adequacy of the management process used to control
interest rate risk and the organization's quantitative level of exposure. When
assessing the interest rate risk management process, the Company seeks to ensure
that appropriate policies, procedures, management information systems, and
internal controls are
27
in place to maintain interest rate risks at prudent levels of consistency and
continuity. Evaluating the quantitative level of interest rate risk exposure
requires the Company to assess the existing and potential future effects of
changes in interest rates on its consolidated financial condition, including
capital adequacy, earnings, liquidity, and asset quality (when appropriate).
The Federal Reserve Board together with the Office of the Comptroller of the
Currency and the Federal Deposit Insurance Company, adopted a Joint Agency
Policy Statement on interest rate risk effective June 26, 1996. The policy
statement provides guidance to examiners and bankers on sound practices for
managing interest rate risk, which will form the basis for ongoing evaluation of
the adequacy of interest rate risk management at supervised institutions. The
policy statement also outlines fundamental elements of sound management that
have been identified in prior Federal Reserve guidance and discusses the
importance of these elements in the context of managing interest rate risk.
Specifically, the guidance emphasizes the need for active Board of Director and
senior management oversight and a comprehensive risk management process that
effectively identifies, measures, and controls interest rate risk.
Financial institutions derive their income primarily from the excess of interest
collected over interest paid. The rates of interest an institution earns on its
assets and owes on its liabilities generally are established contractually for a
period of time. Since market interest rates change over time, an institution is
exposed to lower profit margins (or losses) if it cannot adapt to interest rate
changes. For example, assume that an institution's assets carry intermediate or
long term fixed rates and that those assets are funded with short-term
liabilities. If market interest rates rise by the time the short-term
liabilities must be refinanced, the increase in the institution's interest
expense on its liabilities may not be sufficiently offset if assets continue to
earn at the long-term fixed rates. Accordingly, an institution's profits could
decrease on existing assets because the institution will either have lower net
interest income or possibly, net interest expense. Similar risks exist when
assets are subject to contractual interest rate ceilings, or rate sensitive
assets are funded by longer-term, fixed-rate liabilities in a declining rate
environment.
There are several ways an institution can manage interest rate risk including:
1) matching repricing periods for new assets and liabilities, for example, by
shortening terms of new loans or investments; 2) selling existing assets or
repaying certain liabilities; and 3) hedging existing assets, liabilities, or
anticipated transactions. An institution might also invest in more complex
financial instruments intended to hedge or otherwise change interest rate risk.
Interest rate swaps, futures contacts, options on futures contracts, and other
such derivative financial instruments can be used for this purpose. Because
these instruments are sensitive to interest rate changes, they require
management's expertise to be effective. The Company has not purchased derivative
financial instruments in the past and does not presently intend to purchase such
instruments.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
The following table provides information about the Company's financial
instruments used for purposes other than trading that are sensitive to changes
in interest rates as of March 31, 2003. It does not present when these items may
actually reprice. For loans receivable, securities, and liabilities with
contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of loans and mortgage backed securities. For core deposits
(demand deposits, interest-bearing checking, savings, and money market deposits)
that have no contractual maturity, the table presents principal cash flows and,
as applicable related, weighted-average interest rates based upon the Company's
historical experience, management's judgment and statistical analysis, as
applicable, concerning their most likely withdrawal behaviors. The current
historical interest rates for core deposits have been assumed to apply for
future periods in this table as the actual interest rates that will need to be
paid to maintain these deposits are not currently known. Weighted average
variable rates are based upon contractual rates existing at the reporting date.
28
PRINCIPAL/NOTIONAL AMOUNT MATURING OR ASSUMED TO WITHDRAW IN:
(DOLLARS IN THOUSANDS)
Comparison of 2003 to 2002: First Years
Total rate-sensitive assets: Year 2 - 5 Thereafter Total
------------ ------------ ----------- -----------
At March 31, 2003 $ 286,903 $ 190,614 $ 130,929 $ 608,446
At December 31, 2002 317,174 217,623 149,581 684,378
----------- ----------- ----------- ----------
Increase (decrease) $ (30,271) $ (27,009) $ (18,652) $ (75,932)
Total rate-sensitive liabilities:
At March 31, 2003 $ 266,540 $ 290,077 $ 41,881 $ 598,498
At December 31, 2002 317,332 339,592 42,961 699,885
----------- ----------- ----------- ----------
Increase (decrease) $ (50,792) $ (49,515) $ (1,080) $ (101,387)
The above table reflects expected maturities, not expected repricing. The
contractual maturities adjusted for anticipated prepayments and anticipated
renewals at current interest rates, as shown in the preceding table, are only
part of the Company's interest rate risk profile. Other important factors
include the ratio of rate-sensitive assets to rate sensitive liabilities (which
takes into consideration loan repricing frequency but not when deposits may be
repriced) and the general level and direction of market interest rates. For core
deposits, the repricing frequency is assumed to be longer than when such
deposits actually reprice. For some rate sensitive liabilities, their repricing
frequency is the same as their contractual maturity. For variable rate loans
receivable, repricing frequency can be daily or monthly and for adjustable rate
loans receivable, repricing can be as frequent as annually for loans whose
contractual maturities range from one to thirty years. While increasingly
aggressive local market competition in lending rates has pushed loan rates
lower; the Company's increased reliance on non-core funding sources has
restricted the Company's ability to reduce funding rates in concert with
declines in lending rates.
The Company manages its interest rate risk by the employment of strategies to
assure that desired levels of both interest-earning assets and interest-bearing
liabilities mature or reprice with similar time frames. Such strategies include;
1) loans receivable which are renewed (and repriced) annually, 2) variable rate
loans, 3) certificates of deposit with terms from one month to six years and 4)
securities available for sale which mature at various times primarily from one
through ten years 5) federal funds borrowings with terms of one day to 90 days,
and 6) Federal Home Loan Bank borrowings with terms of one day to ten years.
29
ITEM 4. CONTROLS AND PROCEDURES
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of Rurban
Financial Corp.'s management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934). Based on their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that the Company's disclosure
controls and procedures are, to the best of their knowledge, effective to ensure
that information required to be disclosed by Rurban Financial Corp. in reports
that it files or submits under the Exchange Act is recorded, processed,
summarized and reported within the time periods specified in Securities and
Exchange Commission rules and forms.
Our Chief Executive Office and Chief Financial Officer have concluded that the
results of the corrective actions taken by Rurban Financial Corp. have been
effective in addressing such significant deficiencies and material weaknesses in
internal controls.
Subsequent to the date of their evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that there were no significant changes in
Rurban Financial Corp's internal controls or in other factors that could
significantly affect its internal controls, including any corrective actions
with regard to significant deficiencies and material weaknesses.
30
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable
Item 2. Changes in Securities and Use of Proceeds
Not applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
Not applicable
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 - Certification of Chief Executive Officer Pursuant to Title 18
USC Section 1350
99.2 - Certification of Chief Financial Officer Pursuant to Title 18
USC Section 1350
b. Reports on Form 8-K
A Form 8-K was filed on January 2, 2003 to report that a "Purchase and
Assumption Agreement" was signed between RFC Banking Company, Rurban's
wholly-owned subsidiary, and The Union Bank Company on December 30,
2002.
A Form 8-K was filed on January 21, 2003 to report that the Corporation
and its wholly owned subsidiary, RFC Banking Company, announced that
they intend to make available for purchase RFC Banking Company bank
branches located in Hancock and Putnam Counties. The offices consist of
the The Peoples Banking Company Division and the First Bank of Ottawa
Division.
A Form 8-K was filed on February 25, 2003 to report that a "Purchase
and Assumption Agreement" was signed on February 22, 2003 with First
Federal Bank of the Midwest, a wholly owned subsidiary of First
Defiance Financial Corp. The agreement outlined the sale of assets and
assumption of deposits at the Corporation's Hancock and Putnam County
branches.
A Form 8-K was filed on February 26, 2003 to report the financial
results for the fourth quarter and year ended December 31, 2002.
A Form 8-K was filed on March 17, 2003 to announce the appointment
of James E. Adams as Chief Financial Officer to replace retiring CFO,
Richard C. Warrener.
31
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has caused this report to be signed on its behalf by the undersigned
hereunto duly authorized.
RURBAN FINANCIAL CORP.
Date: May 14, 2003 By /S/ Kenneth A. Joyce
------------ --------------------------
Kenneth A. Joyce
President & Chief Executive Officer
By /S/ Duane L. Sinn
--------------------------
Duane L. Sinn
Senior Vice President &
Interim Chief Financial Officer
32
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
I, Kenneth A Joyce, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rurban Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003 /S/ Kenneth A. Joyce
------------ ------------------------------------------
Kenneth A. Joyce
President & Chief
Executive Officer
33
CERTIFICATION OF CHIEF FINANCIAL OFFICER
I, Duane L. Sinn, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rurban Financial
Corp.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: May 14, 2003
------------- /S/ Duane L. Sinn
----------------------------------------
Duane L. Sinn
Senior Vice President &
Interim Chief Financial Officer
34